It’s time for a rethink on First Homes

This would matter less if new First Homes were additional to existing affordable housing provision. But they are not. Instead, the government is telling local authorities that First Homes must comprise at least 25% of the affordable homes delivered through the planning system and that there should be an equivalent reduction in shared ownership and affordable rent homes.

The obligation will trump the assessment of local needs made by local authorities – central government has decided it knows best.

In terms of overall provision of affordable housing, this is a big deal. Analysis by Savills based on delivery in the past three years suggests it will entail the loss of nearly 7,000 “traditional” affordable homes per annum.

Swapping shared ownership for First Homes means supporting people with a healthy deposit at the expense of people without one, and therefore in all probability giving more to those with access to the ‘bank of mum and dad’ at the expense of the less fortunate.

Swapping affordable rent for First Homes means helping people on reasonable incomes at the expense of people on very low incomes, including people who might be homeless. Clearly there are some quite big moral problems with this. It will also end up costing taxpayers’ money when, as a result, some households who would have been allocated an affordable rent home remain stuck in expensive temporary accommodation instead. It’s an unusual take on ‘levelling up’.

Then there are the practical problems. The government has said that it wants developers to deliver the same number of affordable homes as they would do under current arrangements (albeit substituting First Homes for shared ownership and affordable rent properties per above). It has also said that it does not want the new scheme to affect the viability of individual schemes – in other words, the returns made by developers.

These two statements are highly unlikely to be compatible.

The obligations imposed on developers to deliver affordable housing reduce the overall value of individual developments, since by its very nature affordable housing is worth less than homes sold on the open market.

However, different types of affordable housing have very different effects on scheme economics.

First Homes will lead to a very sharp reduction in value compared with open market housing. This is because of the high level of discount on offer and because developers will only get a receipt once the homes are sold.

Conversely, shared ownership leads to only a modest reduction in value compared with open market homes. In part this is because it is less generous deal, with new homeowners expected to pay rent on the portion of the home they don’t own.

Producing this type of affordable housing also helps developers with their financing costs, since the homes are usually sold to housing associations which make staged payments as the development progresses. Housing associations also buy affordable rent homes on similar terms, which means that on many schemes, even these homes – often rented to the most vulnerable at significant discount – will be worth more to developers than First Homes.

As a result, on many schemes introducing First Homes at the expense of shared ownership and affordable rent homes will materially reduce developers’ margins, and in some cases make schemes unviable. The redevelopment of brownfield sites – which ministers claim to support as a better alternative than building on the green belt – is likely to be particularly badly affected because the schemes are often much more expensive to deliver.

The problem is likely to be aggravated in high-value areas. The government has imposed a £250k cap on the price of a First Home. Factoring in the expected 30% discount, this means the homes on offer should be worth no more than around £350k on the open market.

This sounds like a lot, but in higher-value areas it might only buy a one-bedroom flat or even a studio. Clearly such homes will do nothing to help families with children and they are not going to look great on schemes that have predominantly two to four-bedroom houses.

The alternative is to offer a higher discount – something the government has factored in by allowing discounts of up to 50%. But there’s an obvious flaw in the plan. Increasing the discount in this way will entail further losses for developers. This is far from a theoretical problem. According to Savills, to live within the £250k cap, the average new build home in the South East of England would need to be discounted by 40%. In places like Hertfordshire, Buckinghamshire and Surrey, the figure is 50%.

Meddling with development economics in this way will inevitably lead to disputes between developers and local authorities. Developers will want to make good any loss in value on a scheme that results from the introduction of First Homes by reducing the overall level of affordable housing they build.

Local authorities – which are already dealing with a massive mismatch between demand for and supply of affordable housing – will inevitably resist. The introduction of First Homes is therefore a one-way ticket to delays. In other words, it is likely to achieve the diametric opposite of the government’s objective to accelerate housebuilding.

To sum up, First Homes will redirect subsidy from those that need it to those that don’t and will reduce the number of new homes we build. It is not exactly a nailed-on winner.

Fortunately for Mr Gove, there is time to change tack. If I was advising him now, I’d suggest delaying the scheme for at least a year to allow for additional pilots (it is, after all, quite an uncertain market, particularly because of supply chain pressures). This would give him time to consider next steps.

In the longer term, the best answer would be to abandon the scheme altogether. But this might be tricky, given that it is a manifesto commitment. An alternative would be to give local authorities discretion to include First Homes in their planning requirements where they consider it best meets local needs. Given that the scheme has very little to do with housing need, this would most likely allow it to wither on the vine without it causing the sort of ructions that I am sure Mr Gove could live without.

Matthew Bailes, chief executive, Paradigm